Response to Welch (2020): Real Estate Collateral Does Affect Corporate Investment

21 Pages Posted: 8 Jun 2020

See all articles by Thomas Chaney

Thomas Chaney

SciencesPo - Sciences Po - Department of Economics; Centre for Economic Policy Research (CEPR)

David Alexandre Sraer

University of California, Berkeley; Princeton University

David Thesmar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: May 12, 2020

Abstract

This short note is a response to Welch (2020), who claims that our results in Chaney, Sraer and Thesmar (2012) are not robust. We show that none of his findings invalidate our results. Welch makes three major points. First, he correctly points out that our baseline specification uses a common scaling factor (lagged capital stock) for our dependent (investment) and independent (real estate collateral) variables, creating a mechanical correlation between left- and right-hand side variables. We show in this note that, while this point is formally correct, our results are robust to controlling for or removing entirely this mechanical correlation. Second, Welch correctly, stresses that real estate prices are serially correlated, so that identification of a real estate collateral channel is potentially complex. We show in this note that our results are robust to controlling for the serial correlation in real estate prices. Third, Welch correctly worries about the fact that real estate prices are driven not just by local shocks (MSA or State), but also by common shocks (national). We show in this note that our results are robust to controlling for common national real estate shocks. In other words, while we recognize that Welch raises several important points, we argue that none of those results invalidate the baseline findings in Chaney, Sraer and Thesmar (2012). Yet, some of these objections suggest interesting leads for further analysis on corporate investment. We describe these leads in the note, hoping that they will inspire future research.

Keywords: Corporate Investment, Collateral Channel

JEL Classification: G31, D22

Suggested Citation

Chaney, Thomas and Sraer, David Alexandre and Thesmar, David, Response to Welch (2020): Real Estate Collateral Does Affect Corporate Investment (May 12, 2020). Available at SSRN: https://ssrn.com/abstract=3599277 or http://dx.doi.org/10.2139/ssrn.3599277

Thomas Chaney

SciencesPo - Sciences Po - Department of Economics ( email )

28, rue des Saints-Pères
Paris, Paris 75007
France

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

David Alexandre Sraer

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

David Thesmar (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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